Being dead on time can save taxes

June 27, 2006 — 10.00am

Even the super-rich cannot cheat death, but some may live long enough to avoid paying estate tax, write Joshua Gans and Andrew Leigh.

THERE are two certainties in life, according to Benjamin Franklin: death and taxes. But can changes in taxation affect the death rate? Is it possible that some people will prolong life to reduce their inheritance tax bill?

To test this, we studied one of the most dramatic changes in inheritance tax law in the developed world — Australia's abolition of inheritance tax.

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While Australia is today one of the few developed countries without an inheritance tax, this has not always been the case.

In 1978, the man then known as the "boy treasurer", John Howard, legislated to scrap federal inheritance taxes. Anybody dying on or after July 1, 1979, would be exempt.

For about one in 10 descendants, the value of avoiding inheritance taxes could be considerable. Before abolition, there was no attempt to decrease the tax rates. In the extreme case, an estate worth more than $1 million would be taxed at a 28 per cent marginal rate if its owner died on June 30, 1979, but zero if he or she died on July 1, 1979.

We asked a simple question: in the week before and after the abolition, how many people prolonged their lives to avoid the tax? Comparing deaths in 1979 with deaths in June and July of other years, we estimated that about 50 people cheated death for long enough to avoid the tax.

This suggests that more than half of those who would have paid the inheritance tax in its last week avoided doing so.

Because our analysis is based only on formal death records, we cannot reject the possibility that the effect we observe reflects misreporting of the death date, rather than changes in the timing of deaths.

Our results are consistent with earlier work by Wojciech Kopczuk and Joel Slemrod, who studied changes in US inheritance tax rates over the 20th century, and found some evidence that the tax rate affected the timing of deaths. It also accords with our own work on the millennium, in which we found that the rate of conceptions, births and deaths rose during the first week of January 2000.

Lastly, these findings have implications for any instance in which policymakers are proposing to abolish inheritance taxes. For example, under US law, the estate of an individual worth more than $3.5 million will be taxed at a marginal rate of 45 per cent if they die in the final week of December 2009, but untaxed if they die in the first week of January 2010.

Our results from the abolition of inheritance taxes in Australia suggest that a significant number of US taxpayers who would face the estate tax if they died in the last week of 2009 may well shift their reported death date to the first week of 2010.

Even the super-rich cannot cheat death forever, but some may be able to stay alive long enough to avoid the estate tax.

Professor Joshua Gans is an economist at Melbourne Business School, University of Melbourne. Dr Andrew Leigh is an economist at the Australian National University. Their economics blogs are at economics.com.au and andrewleigh.com respectively.